Chapter 16
Standard Costing, Variance Analysis, and Kaizen
Costing
STANDARD COST a budget for the production of one unit of product or
service
STANDARD COST a budget for the production of one unit of product or
service
ACTUAL COST used in the
production of the product or service
ACTUAL COST used in the
production of the product or service
COST VARIANCE the difference
between the actual cost and the standard cost COST VARIANCE
the difference between the actual cost and the standard cost
Using Standard-Costing
Systems for Control
Take the time to investigate only significant cost variancesTake the time to investigate only significant cost variances What is significant?What is significant?
Depends on the Size of the
Organization Depends on the Size of the
Organization
Depends on the Type of
the
Organization Depends on
the Type of the
Organization
Depends on the
Production Process
Depends on the
Production Process
Management by Exception
Perfection Vs. Practical Standards
PERFECTION STANDARDS PERFECTION
STANDARDS
PRACTICAL OR ATTAINABLE
STANDARDS PRACTICAL OR
ATTAINABLE STANDARDS
Can only be attained under near perfect
conditions
Can only be attained under near perfect
conditions
Tight as practical, but still are expected
to be attained Tight as practical, but still are expected
to be attained
•Occasional machine breakdowns
•Normal amounts of raw material
waste
•Occasional machine breakdowns
•Normal amounts of raw material
waste
•Peak efficiency
•Lowest possible input prices
•best-quality material
•no disruption in production
•Peak efficiency
•Lowest possible input prices
•best-quality material
•no disruption in production
Standards can be used by service firms, nonprofit organizations, and governmental units
Standards can be used by service firms, nonprofit organizations, and governmental units
Implementing and maintaining cost standards can be time-consuming, labor-intensive, and expensive.
Implementing and maintaining cost standards can be time-consuming, labor-intensive, and expensive.
Use Of Standards
COST BENEFITS
COST BENEFITS
Standard quantity:
Fabric in finished
product 11 sq. meters Allowance for
normal waste 1 sq. meters Total standard
quantity required
per tent 12 sq. meters Standard quantity:
Fabric in finished
product 11 sq. meters Allowance for
normal waste 1 sq. meters Total standard
quantity required
per tent 12 sq. meters
Koala Camp Gear CompanyKoala Camp
Gear Company
DIRECT MATERIAL STANDARDSDIRECT MATERIAL STANDARDS
The total amount of material normally required to produce
a finished product including allowances for normal waste
or efficiency
The total amount of material normally required to produce
a finished product including allowances for normal waste
or efficiency
The total delivered cost, after
subtracting any purchase discounts The total delivered
cost, after subtracting any purchase discounts
Cost Variance Analysis
Koala Camp Gear Company
Koala Camp Gear Company
DIRECT LABOR STANDARDS DIRECT LABOR STANDARDS
Cost Variance Analysis
Direct material:
Standard direct-material cost per tent (12 sq.
meters x $8 pr sq. meter) $96
Actual output x3,000
Total standard direct-
material cost $288,000
Direct material:
Standard direct-material cost per tent (12 sq.
meters x $8 pr sq. meter) $96
Actual output x3,000
Total standard direct-
material cost $288,000
Koala Camp Gear Company
Koala Camp Gear Company
The standard cost for the direct-material and direct-labor inputs
is based upon Koala’s actual output of
3,000 tents
The standard cost for the direct-material and direct-labor inputs
is based upon Koala’s actual output of
3,000 tents
They should incur a cost of $396,000 ($288,000 + $108,000)
to make 3,000 tents They should incur a cost of $396,000 ($288,000 + $108,000)
to make 3,000 tents
Standard Costs Given Actual
Output
40,000 sq.
meters purchased
$8.15 per sq. meter 40,000 sq.
meters purchased
$8.00 per sq. meter
36,000 sq. meters
allowed
$8.00 per sq. meter
$326,000 $320,000 $288,000
$6,000U
36,400 sq.
meters used
$8.00 per sq.
meter
$291,200
Direct-material price variance
$3,200U
Direct- material quantity
variance
x
x x
Analysis Of Material Variances
Actual Actual quantity quantity Actual
Actual price price Actual
Actual quantity quantity
Standard Standard
price price
Standard Standard quantity quantity
Standard Standard
price price xx
xx xx
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
First, the company purchased fabric at a higher price ($8.15 per square meter) than the standard price ($8.00 per square meter).
First, the company purchased fabric at a higher price ($8.15 per square meter) than the standard price ($8.00 per square meter).
Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased
AP = Actual price SP = Standard price
Direct-material price variance = (PQ X AP) - (PQ X SP) = PQ(AP - SP) where: PQ = Quantity purchased
AP = Actual price SP = Standard price
Koala’s direct- material price variance for June is computed as follows:
Direct-material price variance = PQ(AP - SP)
= 40,000 ($8.15 - $8.00) = $6,000 unfavorable
Koala’s direct- material price variance for June is computed as follows:
Direct-material price variance = PQ(AP - SP)
= 40,000 ($8.15 - $8.00) = $6,000 unfavorable
Direct-Material Variances
Second, the company used more fabric than the standard price.
(36,400 sq. meters actually used, instead of the standard amount of 36,000 sq. meters)
Second, the company used more fabric than the standard price.
(36,400 sq. meters actually used, instead of the standard amount of 36,000 sq. meters)
Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ) where:
AQ = Actual quantity used SQ = Standard quantity allowed
Direct-material quantity variance = (AQ X SP) - (SQ X SP) = SQ(AQ - SQ) where:
AQ = Actual quantity used SQ = Standard quantity allowed
Koala’s direct- material quantity variance for June is computed as follows:
Direct-material quantity variance = SP(AQ - SQ)
= $8.00(36,400 - 36,000)
=$3,200 unfavorable
Koala’s direct- material quantity variance for June is computed as follows:
Direct-material quantity variance = SP(AQ - SQ)
= $8.00(36,400 - 36,000)
=$3,200 unfavorable
What caused Koala to spend more than the anticipated amount on direct material?
What caused Koala to spend more than the anticipated amount on direct material?
Direct-Material Variances
X X X
Actual Labor Cost Standard Labor Cost
Actual hours
Standard price Actual
rate
Actual hours
Standard rate
Standard X rate
X X
5,900 hours used
$19 per hour
5,900 hours
used
$18 per hour
6,000 hours allowed
$18 per hour
$112,100 $106,200 $108,000
$5,900 Unfavorable $1,800 Favorable Direct-labor
rate variance
Direct-labor efficiency variance
$4,100 Unfavorable Direct-labor variance
Analysis of Direct-Labor Variances
What caused Koala to spend more than the anticipated amount on direct labor?
What caused Koala to spend more than the anticipated amount on direct labor?
First, the company incurred a cost of $19 per hour for direct labor instead of the standard amount of $18 per hour First, the company incurred a cost of $19 per hour for direct
labor instead of the standard amount of $18 per hour Direct-labor rate variance = (AH X AR) - (AH X SR) =
AH(AR - SR) where:
AH = Actual hours used AR = Actual rate per hour SR = Standard rate per hour
Direct-labor rate variance = (AH X AR) - (AH X SR) = AH(AR - SR) where:
AH = Actual hours used AR = Actual rate per hour SR = Standard rate per hour
Koala’s direct-labor rate variance for June is computed as follows:
Direct-labor rate variance = AH(AR - SR)
= 5,900 ($19 - $18)
=$5,900 unfavorable
Koala’s direct-labor rate variance for June is computed as follows:
Direct-labor rate variance = AH(AR - SR)
= 5,900 ($19 - $18)
=$5,900 unfavorable
Direct-Labor Variances
Koala used only 5,900 hours of direct labor, which is < standard quantity of 6,000 hours, given actual output of 3,000 tents. The increased efficiency does not fully offset the unexpectedly high
wage rate.
Koala used only 5,900 hours of direct labor, which is < standard quantity of 6,000 hours, given actual output of 3,000 tents. The increased efficiency does not fully offset the unexpectedly high
wage rate.
Direct-labor efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH) where:
AH = Actual hours used SH = Standard hours allowed
Direct-labor efficiency variance = (AH X SR) - (SH X SR) = SR(AH - SH) where:
AH = Actual hours used SH = Standard hours allowed
Koala’s direct - labor efficiency variance for June is computed as follows:
Direct - labor efficiency variance = SR(AH - SH)
= $18 (5,900 - 6,000) = $1,800 favorable
Koala’s direct - labor efficiency variance for June is computed as follows:
Direct - labor efficiency variance = SR(AH - SH)
= $18 (5,900 - 6,000) = $1,800 favorable
What caused Koala to spend more than the anticipated amount on direct labor?
What caused Koala to spend more than the anticipated amount on direct labor?
Direct-Labor Variances
Direct material X $1,500 F $1,900 U Direct material Y 2,400 U 300 U Direct material Z 900 U 400 F Total variance $1,800 U $1,800 U Direct material X $1,500 F $1,900 U Direct material Y 2,400 U 300 U Direct material Z 900 U 400 F Total variance $1,800 U $1,800 U
When there are several types of direct material or direct labor, price and quantity variances are computed for
each type, and then added to obtain a total price variance and a total quality variance
When there are several types of direct material or direct labor, price and quantity variances are computed for
each type, and then added to obtain a total price variance and a total quality variance
Multiple Types Of Direct
Material Or Direct Labor
Controllability
A manager is more likely to investigate a variance
that is controllable by someone in the organization than one
that is not
Controllability
A manager is more likely to investigate a variance
that is controllable by someone in the organization than one
that is not
Favorable Variances
It is as important to investigate significant favorable variances as
well as significant unfavorable variances
Favorable Variances
It is as important to investigate significant favorable variances as
well as significant unfavorable variances
Cost and Benefits of Investigation
The decision whether to
investigate a variance is a cost - benefit decision
Cost and Benefits of Investigation
The decision whether to
investigate a variance is a cost - benefit decision
Additional Issues
Behavioral Effects Of Standard Costing
Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments
Standard costs, budgets, and variances are used to evaluate the performance of individuals and departments
They can profoundly influence behavior when they are used to determine salary increases, bonuses, and promotions
They can profoundly influence behavior when they are used to determine salary increases, bonuses, and promotions
Direct-material price variance
Direct-material quantity variance
Direct-labor rate variance
Direct- labor efficiency variance
The purchasing manager
The production supervisor
The production supervisor
The production supervisor
Get the best prices available for purchased goods and services through skillful purchasing practices
Skillful supervision and motivation of production employees, coupled with the careful use and handling of materials, contribute to minimal waste
Generally results from using a different mix of employees than that anticipated when the standard were set
Motivating employees toward production goals and effective work schedules improves efficiency
Which Managers Generally
Influence Cost Variances?
Variances are temporary accounts, like
revenue and expense accounts, and they are closed out at the end of
the accounting period.
Variances are temporary accounts, like
revenue and expense accounts, and they are closed out at the end of
the accounting period.
Cost of Goods Sold
Unfavorable variances represent costs of operating inefficiently, relative to the standards, and
thus cause the Cost of Goods Sold
to be higher
Favorable variances represent costs of operating efficiently, relative to the standards, and
thus cause the Cost of Goods Sold
to be lower
Disposition Of Variances
KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product. Improvement is the goal and
responsibility of each worker.
KAIZEN COSTING is the process of cost reduction during the manufacturing phase of a product. Improvement is the goal and
responsibility of each worker.
Cost per product unit
12/31/x0 12/31/x1
Time Cost base
for next year
Actual cost reduction
achieved Current year
cost base
Kaizen goal:
cost reduction rate
Actual cost performance
of the current year
Kaizen Costing
Chapter 17
Flexible Budgets, Overhead
Cost Management, and
Activity-Based Budgeting
A flexible budget is valid for a range of activity
A flexible budget is valid for
a range of activity A static budget is based on a particular planned
level of activity A static budget
is based on a particular planned
level of activity This range of activity is
the relevant range This range of activity is
the relevant range
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
A flexible overhead budget is defined as a detailed plan for controlling overhead cost
valid in the firm’s relevant range of activity
What Are Flexible Overhead
Budgets?
彈性預算 V.S. 靜態預算
• 彈性預算不是只以一個作業水準為基礎，而係在 公司作業的攸關範圍內，估計不同產量下的預算
，進而有效控制製造費用的詳細計畫。
• 靜態預算則是以特定的預計作業水準為基礎來編
製製造費用預算。
Based on planned June production of
4,000 tents, at 1.5 machine hours per
tent.
We cannot tell from this budget what it would cost to make
3,000 tents.
Based on planned June production of
4,000 tents, at 1.5 machine hours per
tent.
We cannot tell from this budget what it would cost to make
3,000 tents.
Based on only ONE anticipated
activity level Based on only ONE anticipated
activity level
Includes several possible activity levels
Static Budget Versus Flexible
Budget
Actual
Electricity Cost Actual
Electricity Cost
Budgeted Electricity Cost
(static budget) Budgeted Electricity Cost
(static budget)
$1,050
$1,050 $1,200$1,200
The manager is comparing the electricity cost incurred at the ACTUAL activity level (3,000 tents) with the budgeted electricity
cost at the PLANNED activity level (4,000 tents).
The manager is comparing the electricity cost incurred at the ACTUAL activity level (3,000 tents) with the budgeted electricity
cost at the PLANNED activity level (4,000 tents).
These activity levels are different, therefore we would expect the electricity cost to be different These activity levels are different, therefore we would expect the electricity cost to be different
Advantages Of Flexible Budgets
Cost Variance Cost Variance
$150 Favorable
$150 Favorable
Actual
Electricity Cost Actual
Electricity Cost
Budgeted Electricity Cost (flexible budget)
Budgeted Electricity Cost
(flexible budget) Cost VarianceCost Variance
$1,050
$1,050 $900$900 $150 Unfavorable$150 Unfavorable
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the budgeted electricity
cost at the ACTUAL activity level, (3,000 tents x 1.5 machine hours) = 4,500 machine hours
The manager is comparing the electricity cost incurred at the ACTUAL activity level, 3,000 tents with the budgeted electricity
cost at the ACTUAL activity level, (3,000 tents x 1.5 machine hours) = 4,500 machine hours
Electrical cost was greater than it should have been, given the actual level of output
Electrical cost was greater than it should have been, given the actual level of output
Advantages Of Flexible Budgets
If you recall, this is similar to the Predetermined Cost-Driver Rate
discussed in Chapter 4.
If you recall, this is similar to the Predetermined Cost-Driver Rate
discussed in Chapter 4.
Total Budgeted Monthly Overhead Cost
=
Budgeted Variable- Overhead Cost per Activity Unit
×
Total Activity
Units
+
Budgeted Fixed- Overhead Cost
per Month
.
EXAMPLE
Assume that the company needs flexible budget numbers for three activity levels:
4,500 hours, 6,000 hours, and 7,500 hours.
Also, assume that the Predetermined Budgeted Variable-Overhead Cost per Activity Unit is $6 per hour. Budgeted
Fixed-Overhead Cost for the month is
$30,000.
EXAMPLE
Assume that the company needs flexible budget numbers for three activity levels:
4,500 hours, 6,000 hours, and 7,500 hours.
Also, assume that the Predetermined Budgeted Variable-Overhead Cost per Activity Unit is $6 per hour. Budgeted
Fixed-Overhead Cost for the month is
$30,000. Flexible Budget?Flexible Budget?
Formula Flexible Budget
$57,000
$66,000
$75,000
= $6 ×
4,500 6,000 7,500
+ $30,000
The flexed total budgeted monthly overhead for each activity level can now be used
effectively in planning and variance analysis.
The flexed total budgeted monthly overhead for each activity level can now be used
effectively in planning and variance analysis.
Formula Flexible Budget
Total Budgeted Monthly Overhead Cost
=
Budgeted Variable- Overhead Cost per Activity Unit
×
Total Activity
Units
+
Budgeted Fixed- Overhead Cost
per Month
Koala manufactured 3,000 tree line tents X 1.5 machine hours per tent
= standard allowed 4,500 machine hours
Koala manufactured 3,000 tree line tents X 1.5 machine hours per tent
= standard allowed 4,500 machine hours
Actual machine hours for June = 4,800 Actual machine hours
for June = 4,800
The total variable overhead variance for June =
Actual variable overhead $30,480 Budget variable overhead $27,000
$ 3,480 U The total variable overhead
variance for June =
Actual variable overhead $30,480 Budget variable overhead $27,000
$ 3,480 U
Overhead Cost Variances
For standard allowed 4,500 machine hours the budget overhead (from Exhibit 17-3) for June =
Variable overhead $27,000 Fixed overhead $30,000
For standard allowed 4,500 machine hours the budget overhead (from Exhibit 17-3) for June =
Variable overhead $27,000 Fixed overhead $30,000
From the cost accounting records, the actual overhead for June = Variable overhead $30,480
Fixed overhead $32,500 $62,980
From the cost accounting records, the actual overhead for June = Variable overhead $30,480
Fixed overhead $32,500 $62,980
The VARIABLE-OVERHEAD SPENDING VARIANCE is the difference between the actual variable overhead cost and the product of the standard
variable -overhead rate and the actual hours of an activity base (or cost driver)
The VARIABLE-OVERHEAD SPENDING VARIANCE is the difference between the actual variable overhead cost and the product of the standard
variable -overhead rate and the actual hours of an activity base (or cost driver)
Variable Overhead Variances
??
?? ???? ???? ????
4,800 machine hours
4,800 machine
hours $6.35 per
machine hour
$6.35 per
machine hour 4,800 machine hours
4,800 machine
hours $6.00 per
machine hour
$6.00 per machine hour Actual variable overhead
Actual variable overhead
Actual machine hours (AH) Actual machine
hours (AH) Actual rate (AVR) Actual rate
(AVR) Actual machine hours (AH) Actual machine
hours (AH) Standard rate (SVR)
Standard rate (SVR)
Actual machine hours × the standard rate
Actual machine hours × the standard rate
$30,480
$30,480 $28,800$28,800
$1,680 Unfavorable Variable-overhead spending variance
$1,680 Unfavorable Variable-overhead spending variance
$27,000
$27,000
$28,800
$28,800
?? ?? ?? ??
The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference between the actual and the standard hours of an activity base (or cost driver)
multiplied by the standard variable overhead rate
The VARIABLE-OVERHEAD EFFICIENCY VARIANCE is the difference between the actual and the standard hours of an activity base (or cost driver)
multiplied by the standard variable overhead rate
Flexible budget:
variable overhead Flexible budget:
variable overhead Standard allowed
machine hours (SH) Standard allowed
machine hours (SH) Standard rate (SVR)
Standard rate (SVR)
Actual machine hours (AH) Actual machine
hours (AH) Standard rate (SVR)
Standard rate (SVR)
Actual machine hours times the standard rate
Actual machine hours times the standard rate
Variable Overhead Variances
4,500 machine hours
4,500 machine
hours $6.00 per
machine hour
$6.00 per machine hour 4,800 machine
hours 4,800 machine
hours $6.00 per
machine hour
$6.00 per machine hour
$1,800 Unfavorable Variable-overhead efficiency variance
$1,800 Unfavorable Variable-overhead efficiency variance
?? ?? ?? ??
The flexible budget amount for variable overhead $27,000 is the amount that will be applied to Work-in-Process for
product-costing purposes
The flexible budget amount for variable overhead $27,000 is the amount that will be applied to Work-in-Process for
product-costing purposes
Flexible budget:
variable overhead Flexible budget:
variable overhead
Standard allowed machine hours (SH)
Standard allowed
machine hours (SH) Standard rate (SVR)
Standard rate (SVR)
Variable overhead applied to work in process Variable overhead applied
to work in process
$27,000
$27,000
Standard allowed machine hours (SH)
Standard allowed
machine hours (SH) Standard rate (SVR)
Standard rate (SVR)
4,500 machine hours
4,500 machine
hours $6.00 per
machine hour
$6.00 per
machine hour 4,500 machine hours
4,500 machine
hours $6.00 per
machine hour
$6.00 per machine hour
No difference No difference
Variable Overhead Variances
$27,000
$27,000
??
The unfavorable variance resulting from using more machine hours than the standard
quantity, given actual output The unfavorable variance resulting from using more machine hours than the standard
quantity, given actual output
The actual labor rate per hour differs from the standard rate The actual labor rate per hour
differs from the standard rate
Efficiency variance
Efficiency variance Spending varianceSpending variance
The variable overhead efficiency variance has nothing to do with
efficient or inefficient use of variable overhead items
The variable overhead efficiency variance has nothing to do with
efficient or inefficient use of variable overhead items
An unfavorable variance means that the total actual cost of variable overhead is > expected,
after adjusting for the actual quantity of machine hours used An unfavorable variance means
that the total actual cost of variable overhead is > expected,
after adjusting for the actual quantity of machine hours used
The spending variance is the real control variance for variable
overhead
The spending variance is the real control variance for variable
overhead
How To Interpret The Variable
Overhead Variances
VOH Efficiency Variance
• VOH efficiency variance has nothing to do with efficient or inefficient usage of electricity, indirect material, and other VOH items. This variance simply reflects an
adjustment in the cost-management analyst’s
expectation about total VOH cost because the company used more than the standard quantity of machine hours.
The FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overhead The FIXED-OVERHEAD BUDGET VARIANCE is the difference between actual fixed overhead and budgeted fixed overhead
Fixed-overhead budget variance
Actual Fixed overhead
Budgeted fixed overhead
= -
Fixed-overhead budget variance
Actual Fixed overhead =
$32,500
Budgeted fixed overhead =
$30,000
= -
Unfavorable variance of
$2,500, because we spent more than budgeted Unfavorable variance of
$2,500, because we spent more than budgeted
Fixed Overhead Budget
Variance
The FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and applied fixed overhead.
Assume that the predetermined fixed overhead per machine hour = $5 and that it is based on 4,500 machine hours.
The FIXED-OVERHEAD VOLUME VARIANCE is the difference between budgeted fixed overhead and applied fixed overhead.
Assume that the predetermined fixed overhead per machine hour = $5 and that it is based on 4,500 machine hours.
Fixed-overhead volume variance
Budgeted fixed overhead
Applied fixed overhead
= -
Applied fixed overhead =
$22,500 Fixed-overhead
volume variance
Budgeted fixed overhead =
$30,000
= -
Variance = $7,500 U, because we produced less than budgeted.
Variance = $7,500 U, because we produced less than budgeted.
Fixed Overhead Volume
Variance
Budget Variance Budget Variance
Volume Variance Volume Variance
The real control variance for fixed overhead
because it compares actual expenditures with
budgeted fixed overhead costs The real control
variance for fixed overhead
because it compares actual expenditures with
budgeted fixed overhead costs
Reconciles the two different purposes of the cost accounting system Reconciles the two different purposes
of the cost accounting system
For cost-management purposes, the cost-
accounting system recognizes that fixed
overhead does not change as production
activity varies For cost-management
purposes, the cost- accounting system recognizes that fixed
overhead does not change as production
activity varies
For product-costing purposes, budgeted
fixed overhead is divided by planned
activity to obtain a predetermined or
standard fixed- overhead rate For product-costing
purposes, budgeted fixed overhead is divided by planned
activity to obtain a predetermined or
standard fixed- overhead rate
Managerial Interpretation Of Fixed-Overhead Variances
係因『實際生產水準』與
『擬定預算固定費用率之 基準產能水準』不同 係因『實際生產水準』與
『擬定預算固定費用率之 基準產能水準』不同
(1) Actual fixed O/H (1) Actual
fixed O/H
(2) Budgeted fixed O/H (2) Budgeted
fixed O/H
(3)
Fixed overhead applied to work in process
(3)
Fixed overhead applied to work in process Standard allowed
machine hours Standard allowed
machine hours
Standard fixed overhead rate Standard fixed
overhead rate
XX
4,500 machine hrs4,500 machine hrs
$5.00 per machine hr$5.00 per machine hr
XX
$30,000
$32,500
Fixed-overhead budget variance =
$2,500 U
Fixed-overhead volume variance =
$7,500 U
$22,500
Fixed Overhead Budget And
Volume Variances
Fixed overhead
$30,000
$22,500
0
Applied fixed overhead ($5.00 per standard allowed machine hour)
Budgeted fixed overhead
Machine hours Volume variance
$7,500
4,500 Standard allowed hours,
given actual output
6,000 Planned monthly activity Applied
fixed overhead
in June
Budgeted Versus Applied Fixed
Overhead
4-, 3-, & 2-way Variance Analysis
Four-way analysis
Three-way analysis
Two-way analysis
Variable- overhead spending variance
Fixed- overhead
budget variance
Variable- overhead efficiency variance
Fixed- overhead
volume variance
$1,680 U $2,500 U $1,800 U $7,500 U
Combined spending variance
$4,180 U $1,800 U $7,500 U
$5,980 U
Combined budget variance
Underapplied overhead
$7,500 U
$62,980 actual overhead - overhead applied to WIP, 49,500 = $13,480
Manufacturing Overhead Manufacturing Overhead
Actual $62,980 $49,500 Applied
Credit:
Indirect-material inventory Wages payable
Utilities payable
Accumulated depreciation Prepaid insurance and property taxes
Engineering salaries payable
19,350 32,610 2,170 1,300 1,050 6,500 Debit:
Work-in-process inventory Applied overhead:
$11.00 (predetermined overhead rate) X
4,500 (standard allowed hours
$49,500
$13,480 Debit:
Cost of goods sold
$13,480
Using Standard Costs In
Product Costing
An activity-based flexible budget may provide more useful cost management information than a conventional flexible budget An activity-based flexible budget may provide more useful cost
management information than a conventional flexible budget
The traditional budget
The traditional budget Activity-based flexible budgetActivity-based flexible budget
Costs are categorized as variable based on
volume measures Costs are categorized
as variable based on volume measures
Machine hours Machine
hours
Direct labor hours Direct
labor hours
Costs are categorized as variable based on
several cost drivers Costs are categorized
as variable based on several cost drivers
Cost that may seem fixed with respect to a single volume-based
cost driver may be variable with respect to other non-volume related
cost drivers
Cost that may seem fixed with respect to a single volume-based
cost driver may be variable with respect to other non-volume related
cost drivers
Activity-Based Flexible Budget
Homework
• Backflush costing
• Exhibit 17-20
